In today’s globalized economy, currency transactions are an integral part of many businesses, especially in countries like Iran, which have economies reliant on international trade. Currency translation, which means converting foreign currency transactions into the national currency (rial), is a key issue in accounting and taxation. In Iran, due to severe fluctuations in exchange rates and the existence of multiple official, agreed, and free rates, currency translation has created specific complexities in taxation. This article examines the concept of currency translation, calculation methods, tax implications, and existing challenges, referencing accounting standards and directives from the Tax Affairs Organization.
What is Currency Translation?
Currency translation is the process by which transactions or financial items based on foreign currency (such as dollars, euros) are converted into the reporting currency (in Iran, rial). According to Iran’s Accounting Standard No. 16, currency translation is performed in two main forms:
Translation of Currency Transactions: Recording individual currency transactions (such as purchases, sales, or debt payments) in the national currency at the time they occur.
Translation of Balance Sheet Items: Converting monetary and non-monetary currency items on the balance sheet date into the national currency.
The translation rate is the rate used to convert foreign currency into rial. In Iran, these rates include the central bank’s official rate, the agreed rate of the NIMA system, and the free rate of the SANA system. Differences arising from changes in exchange rates are recorded as exchange gains or losses in the financial statements.
Accounting Standard No. 16 and Currency Translation
Iran’s Accounting Standard No. 16 provides the main framework for currency translation. Based on this standard:
Currency transactions are recorded in rial at the exchange rate on the transaction date (spot rate).
Monetary items (such as cash, receivables, and foreign currency debt) are translated at the exchange rate on the balance sheet date. The difference from this translation is recorded as a gain or loss in the income statement.
Non-monetary items (such as inventory, fixed assets, or prepaid expenses) are translated at the exchange rate on the transaction date and do not change in subsequent periods.
Exchange gains or losses are usually recorded in the income statement for the period unless allocated to equity or retained losses in specific cases. The referenced source emphasizes that the translation rate should be determined based on valid rates (such as those from the SANA or NIMA systems) to prevent discrepancies in financial reporting.
Methods of Currency Translation
Companies use various methods for currency translation, depending on the type of activity and legal requirements:
Transaction Date Rate Method: Each transaction is recorded at the exchange rate on the date it occurs. This method is suitable for companies with a high volume of currency transactions.
Average Period Rate Method: The average exchange rate over a period (e.g., monthly) is used for translation. This method is less common in Iran due to currency fluctuations.
Period-End Rate Method: Currency items at the end of the financial period (e.g., year-end) are translated at the exchange rate on that date. This method is common for translating monetary balance sheet items. According to the source, the Tax Affairs Organization accepts the exchange rates from the SANA system (average buying and selling rates) as the main reference for translating currency transactions. For specific transactions, such as importing essential goods, the official rates from the central bank or the NIMA system are utilized.
Tax Implications of Currency Translation
Currency translation has significant impacts on the tax obligations of companies. According to Iranian tax laws and directives from the Tax Affairs Organization:
Currency Translation Profit:
Profit from currency translation is typically recorded as non-operating income on tax returns and is subject to income tax. However, according to Article 141 of the Direct Taxation Law, profits from currency translation resulting from the export of non-oil goods and services (such as agricultural and industrial products) are exempt from tax. The referenced source, Tax Directive No. 200/1401/6 (dated April 30, 2022), indicates that profits from export currency translation will be tax-exempt if properly documented.
Currency Translation Loss:
Losses from currency translation are generally not accepted as tax-deductible expenses, unless directly related to export activities. This is one of the main challenges for companies in Iran, as currency fluctuations can lead to significant losses.
Translation of Foreign Currency Debts:
Foreign currency debts (such as bank loans) are translated at the current exchange rate upon repayment. The resulting difference from this translation can be recognized as profit or loss, and taxes are calculated based on prevailing laws.
Directives and Guidelines from the Tax Affairs Organization:
The Iranian Tax Affairs Organization has issued various directives that provide specific frameworks for currency translation. The referenced source in Tax Directive No. 200/1401/6 states that:
The translation rate for currency transactions should be based on rates announced in the Sena system.
Currency translation profits from exports are tax-exempt, provided relevant documents (such as export licenses and currency return certificates) are submitted.
For the translation of balance sheet items, the end-of-period rate (Sena system rate on the last day of the period) is applicable.
Additionally, other directives, such as Tax Directive No. 200/98/68 (dated October 12, 2019), emphasize the necessity of using valid rates and precise documentation.
Challenges of Currency Translation in Taxation:
Currency translation in Iran faces multiple challenges:
Severe Currency Fluctuations: The existence of multiple rates (official, Nima, Sena) and daily currency fluctuations complicates translation calculations and increases the risk of discrepancies in financial reporting.
Non-Acceptance of Currency Translation Losses: The non-acceptance of translation losses as tax-deductible expenses places additional financial pressure on companies, especially in unfavorable economic conditions.
Documentation for Export Exemptions: Obtaining tax exemptions for profits from export currency translation requires precise documentation, which can sometimes be hindered by bureaucratic complexities.
Differences in Translation Rates: Discrepancies between official and free market rates can lead to the recognition of unrealized profits or losses that do not align with financial reporting objectives.
Solutions and Recommendations:
To improve the currency translation process in taxation, the following actions are recommended:
Standardization of Translation Rates: Utilizing a single reference rate (such as the Sena rate) for all currency transactions can enhance transparency.
Acceptance of Translation Losses as Expenses: Revising tax laws to accept currency translation losses as deductible expenses, especially for companies engaged in international trade.
Training and Awareness: Conducting training courses for accountants and financial managers on currency translation standards and tax requirements.
Digitalization of Processes: Developing online systems for recording and verifying translation rates and export documentation to reduce errors and expedite processes.
Conclusion:
Currency translation is one of the most critical accounting and taxation processes in Iran, directly impacting the profitability and tax obligations of companies. Accounting Standard No. 16 and directives from the Tax Affairs Organization provide specific frameworks for this process, but challenges such as currency fluctuations and documentation complexities still exist. By adopting appropriate solutions and enhancing coordination between financial and business entities, the transparency and efficiency of this process can be improved. Ultimately, awareness of the laws and the use of valid rates such as those from the Sena system are key to companies successfully managing currency translation and reducing tax risks.
